Unauthorized Trading

Unauthorized trading or “rogue trading” in a non-discretionary account involves the purchase or sale of a security by a broker without the prior consent of the customer. It is important note that properly authorized discretionary trading is not unauthorized granted proper written authority to a particular broker or brokers has been granted.

When is Best Time to Act?:

Unauthorized trading allegation can arise months, or years after the trade has occurred. It is important to seek the advice of counsel as soon as there is any indication of potential risk. This rule is especially true in investment accounts that are subject to the normally high volume of trading or accounts that have incurred substantial losses.

Types of Crimes & Charges:

Unauthorized trading involves a broker under either his or her own direction or the direction of an employer making trades without an investor’s consent. Often unauthorized trading is a practice, which is encouraged by a firm or is often ignored as a matter of practice. In either case, individuals or firms can be held liable for this pattern of conduct.

Criminal Schemes:

Unauthorized trading allegations most often fall under a number of state and federal level securities laws, which carry civil fines and penalties. However, in extreme cases criminal prosecutions can result from extreme instances of unauthorized trading under state and federal securities fraud laws. These types of cases are often filed under securities fraud provisions or state law provisions covering criminal fraud.

Related Crimes:

State and federal criminal fraud laws cover instances of unauthorized trading, particularly when the unauthorized trades are coupled with intent to deceive the investor for financial gain.

Regulations/Legislation:

Section 10(b) of the Securities Exchange Act prohibits manipulative or deceptive practices in the course of the purchase or sale securities. Rule 10b-5, , makes it unlawful for any person, in connection with the purchase or sale of any security, to: employ any device, scheme or artifice to defraud; to make any untrue statement of material fact; or, to engage in any act which operates or would operate as a fraud or deceit on any person (17 C.F.R. §240.10b-5).
Further NYSE Rule 408 and Article III, Section 15 of the NASD Rules of Fair Practice. FINRA Rules 2510(b) and 2020 and NYSE Rule 408(a) prohibit a broker from making or exercising discretionary trading authority in a customer’s account without consent
Beyond these "statutory" provisions , unauthorized trading can also lead to claims of breach of contract, breach of fiduciary duty and negligence. In extreme examples, unauthorized trading, when willfully ignored by the brokerage firm and/or intentionally conducted by the stockbroker, can lead to findings of gross negligence

Penalties & Punishment:

Unauthorized trading is a violation of securities law it can also subject violtors to criminal prosecutions and civil injunctive suits instituted by the SEC; however, in extreme cases of unauthorized trading involving catastrophic losses violators have been subject to incarceration.
Penalties of unauthorized trading can range from civil fines and penalties to criminal sanctions that often follow large scale examples of unauthorized trading.

Successful Defense:

Common defenses to unauthorized trading involve the defenses of ratification by the customer, estoppel or waiver.

High Profile/ Govt. cases:

Recent years have witnessed a bevy of unauthorized trading cases involving massive losses for investors. Some of the largest cases of rogue trading have occurred overseas, however, in the last decade the United States has witnessed its share of substantial losses incurred by unauthorized trading.